It’s been a great couple of weeks for David Stockman. Granted, he’s been called “unhinged,” “nonsensical,” and “a cranky old man,” after arguing in the Times that the current bull market is a huge bubble, and that America’s economic woes stem from the Federal Reserve’s profligacy and from F.D.R.’s taking us off the gold standard. But the controversy has made his new book, “The Great Deformation,” a best-seller—a surprising fate for a seven-hundred-page work of monetary history. All of a sudden, he’s doing “The Daily Show” and sparring with Paul Krugman on Sunday-morning television.
Controversy is nothing new to Stockman—there seemed to be a new one every week during his time as Ronald Reagan’s budget chief—and when I spoke to him last week he was unfazed by the criticism, though he seemed energized by the attention. Words spilled out of him in an unstoppable torrent. “The Fed’s relentless campaign to keep interest rates artificially low may have deferred the day of reckoning,” he said. “But we cannot escape it forever.” The nub of his argument is that the “heroin” of cheap money has corrupted the U.S. economy. Politicians have piled up trillions of dollars in national debt with no thought of the future; financial markets are nothing more than debt-addicted speculation machines; and investors, as he put it in the Times, should “get out of the markets and hide” before the big crash comes.
Some would say that Stockman is hardly in a position to give us a lecture on the perils of too much debt. Though he was an advocate of a balanced budget in the Reagan Administration, he later became a leveraged-buyout specialist, and you can’t do leveraged buyouts without, well, leverage: the industry depends on cheap debt for its profits. His private-equity work ended in disaster—a company that he took over went bankrupt, and he was forced to resign and was indicted for accounting fraud (the charges were dropped). But in conversation he likes to explain the failure of the business as a road-to-Damascus moment. “This was the wakeup call from the sky,” he said. “It made me realize that it was easy to think that outrageous levels of debt were totally reasonable.” In other words, Stockman, having succumbed to temptation himself, is better placed to warn the rest of us.
That sounds awfully convenient. But many of the attacks in Stockman’s book are on target, and his distaste for Wall Street is genuine. He condemns the L.B.O. industry as little more than an exercise in asset-stripping and financial engineering. He’s right that the tax-deductibility of interest encourages companies to accumulate debt. And, unlike some conservative pundits—for whom attacking “crony capitalism” is a sneaky way of arguing against regulation—he is an equal-opportunity critic. He attacks President Obama’s stimulus plan, but he also believes that the government should have taken over insolvent big banks during the financial crisis. He’s an ideologue, but he’s an honest one.
Still, honesty gets you only so far, and Stockman’s broader thesis is unconvincing. He thinks that, when bad times hit, the government should just let events play out, rather than use discretionary fiscal or monetary policy to combat them. In part, this is because he thinks that the government can’t do much to help a weak economy. Indeed, he believes that intervening after a crash makes the next one worse. As he sees it, the Fed has been blowing bubbles for twenty-five years—whenever one bursts, the Fed pumps money into the economy, which leads to the inflation of a new, bigger bubble. Without periodic “purges of excess and error,” the economy heads for disaster. That’s why he longs for the days of the gold standard: it kept the hands of central bankers tied.
The simplicity of this idea gives it a certain visceral appeal. Yet, to believe it, you’d have to ignore the fact that, under the gold standard, bubbles and financial crises were commonplace: Britain had five between 1825 and 1866; the U.S. had crises in 1873, 1884, 1890, 1893, and 1907. Stockman told me, “Bad monetary policy is causing free markets to do bad things that they wouldn’t otherwise do.” The number of crises in the nineteenth century, however, suggests that they were not the creation of irresponsible central bankers but a phenomenon endemic to markets. On top of that, recessions in the gold-standard era tended to be longer and more severe than subsequent ones. Between 1873 and 1913, the U.S. economy was in recession for fully half the time, and the Great Depression was a far more destructive downturn than anything since. Suppose all these recessions really did purge the economy of error; they still caused an enormous amount of pain that could have been mitigated by government intervention.
Clearly, though, mitigating pain is the last thing on Stockman’s mind. For him, pain is the way we learn discipline, and, the more closely you read “The Great Deformation,” the more you sense that the impulse behind it isn’t so much economic as moral. Stockman, who studied at Harvard Divinity School, favors language that is explicitly theological: Keynesian “sin,” the “demon” of debt, the “devil’s workshop” of the New Deal. “The Great Deformation” looks like monetary history, but it’s really a classic example of the American jeremiad—a twenty-first-century counterpart to Jonathan Edwards’s famous sermon “Sinners in the Hands of an Angry God.” Stockman laments our fall from the path of righteousness and foretells destruction if we do not repent. This is bad economics—the economy is not a morality play—but it is excellent preaching, which explains why this is Stockman’s moment. In times of crisis, as the Puritans knew, Americans never tire of hearing how we’ve lost our way.